Commissioner of Income Tax vs Mascot (India) Tools and Forgings (P) Ltd.

The present Income Tax appeal filed u/s 260A of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), has been admitted on the following substantial questions of law framed in the memo of appeal:

Whether, on the facts and circumstances of the case, was the Income Tax Appellate Tribunal legally justified in holding that both Section 145(1) proviso and Section 145(2) of the Income Tax Act, 1961, are not applicable in the case and whether the findings of the Income Tax Appellate Tribunal in deleting the additions of Rs. 37,68,113, Rs. 5,73,832, Rs. 15,99,123 and Rs. 10,225 are sustainable in the eyes of law?

Whether the Income Tax Appellate Tribunal, on the facts and circumstances of the case, is legally correct in holding that the applicability of 22 per cent, on the entire turnover disclosed by the assessee was not justified when admittedly the assessee''s books of account are not reliable nor complete and the net profit could not be correctly and accurately deduced therefrom?

Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal was legally correct in deleting the addition of Rs. 5,73,832 on account of commission on indirect export sales and whether there was basis for such deletion?

Whether the deletion of Rs. 15,99,153 by the Income Tax Appellate Tribunal which was added by the Assessing Officer, on account of suppression in the domestic sales and unaccounted local sales was legally justified?

Whether the Income Tax Appellate Tribunal was legally justified, on fact and in law, in upholding the deletion of Rs. 96,663 made by the Commissioner of Income Tax (Appeals) relating to excise although it related to the earlier years?

The appeal relates to the assessment year 1988-89.

Briefly stated the facts giving rise to the present appeal are as follows:

The appellant-company is engaged in the business of manufacturing of drop forged hand tools. Such business is being carried on by the assessee from 1974. The assessee furnished return declaring income of Rs. 18,95,410 on July 27, 1988. The return of income was accompanied with the audited statement of accounts, audit report u/s 32AB, tax audit report u/s 44AB, audit report in Form No. 10CCA u/s 80HHC(4). The assessee declared gross profit of Rs. 94,65,317 on total turnover of Rs. 3,07,64,116 giving a gross profit rate of 30.77 per cent, as against gross profit of Rs. 69,74,736 on total turnover of Rs. 2,61,05,355 showing gross profit rate of 26.72 per cent, in the preceding year.

The assessing authority has made an addition of Rs. 37,68,113 to the income disclosed, he also rejected the books results and applied the net profit rate of 22 per cent, on the entire turnover and made an addition of Rs. 15,99,123 on this account after excluding the two additions of Rs. 15,99,158 and Rs. 5,73,832. Therefore, an amount of Rs. 15,99,123 was added as net addition in the declared profit made by applying a net profit rate of 22 per cent. The assessing authority made certain other additions to the assessee''s disclosed turnover. The Commissioner of Income Tax (Appeals), however, partly allowed the appeal but upheld all major additions made by assessing authority. The Tribunal, vide its order dated January 8, 1999, partly allowed the appeal of the assessee and dismissed the cross-appeal filed by the Revenue thereby deleting the additions made by the assessing authority. Hence, the present appeal.

Heard Sri Shambhu Chopra, learned standing Counsel for the Revenue and Sri S.D. Singh appearing for the assessee.

The main controversy is with regard to the addition of Rs. 15,99,158 made by the assessing authority on account of alleged suppression in the domestic sales; rejection of book results and applying a net profit rate of 22 per cent; by the assessing authority and disallowance of Rs. 5,71,832 paid by the assessee as commission on indirect export sales.

The Tribunal while deleting the addition of Rs. 15,99,158 made by the Assessing Officer on account of alleged suppression in domestic sales has dealt with each and every aspect of the matter and also met the reasoning of the Assessing Officer and was of the opinion that the addition of Rs. 15,99,158 made by the Assessing Officer on account of alleged suppression in domestic sales was unjustified. The assessee had claimed commission and discount of Rs. 11,80,488. This commission and discount was ranging between 1 and 7 per cent, in the case of different parties. The assessee explained that on local sale, cash discount of 1 per cent, is allowed to the customers and 3 per cent, agency commission is allowed to the agent. On export sales, agency commission was 5 per cent, except in the case of M/s. Kajriwal Enterprises to whom commission at 7 per cent, was allowed. The Assessing Officer had also noted the complete details of the commission paid by assessee. The details of domestic sales, commission and discount paid thereon was furnished by the assessee before the lower authorities. The entire sales made by the assessee are of excisable goods. While deleting the addition of Rs. 15,99,158 made by the Assessing Officer the Tribunal, inter alia, has observed as follows :

It is beyond comprehension that the charge of alleged suppression of sales has been confirmed by the Commissioner of Income Tax (Appeals) without applying his mind on such elaborate written submission and comprehensive details submitted before him by the assessee. The Assessing Officer has brought no material or evidence on records to prove the existence of any unaccounted local sales having been made by the assessee. The sales declared by the assessee are of excisable goods. The correctness of declared sales are supported by regular books of account which have duly been audited by the auditors as required by various provisions of the Companies Act and the Income Tax Act. The auditors have given unqualified report. The excise authorities have not doubted the correctness of the declared sales. The sales recorded in the books of account are supported by various excise registers, which are periodically checked and verified by the excise authorities. It is beyond comprehension that any addition on account of alleged suppressed sales can be made without any valid basis whatsoever on record. We are, therefore, of the considered opinion that the addition of Rs. 15,99,158 made by the Assessing Officer and confirmed by the learned Commissioner of Income Tax (Appeals) on account of alleged suppression of domestic sales is patently wrong. The same is, therefore, deleted.

The findings recorded by the Tribunal is based on appreciation of fact and material available on record. We do not find any illegality or infirmity in the order passed by the Tribunal on the aforesaid issue.

The next controversy is with regard to the rejection of book results and applying a net profit rate of 22 per cent, on the entire amount of turnover by the assessing authority. The same did not find favour with the Tribunal who has deleted the entire addition of Rs. 37,68,113 worked out by the assessing authority. For ready reference paragraph 4.8 of the Tribunal''s order is quoted herein below:

We have elaborately discussed herein before all the reasons mentioned by the Assessing Officer, in the assessment order for rejecting the books results and also submissions made on behalf of the asses-see before the Departmental authorities as well as before us. The correctness of the declared trading results are supported by regular books of account maintained by the assessee. The assessee has followed recognized and valid method of accounting. Similar method of accounting has been followed by the assessee for the past so many years. The correctness of the books results was always accepted in the past. The accounts of the assessee have been audited by the auditors in accordance with the provisions of the Companies Act and as required under Sections 44AB and 80HHC of the Income Tax Act, 1961. These auditors have given unqualified reports. The correctness of the declared results are also supported by other supporting records such as vouchers for sales, purchases and other expenses. The quantitative details are also supported by day-to-day stock record, various registers required to be maintained under the excise laws. The correctness of the declared production and sales have not been doubted by the excise authorities. The Assessing Officer has failed to find any single instance of inflation of purchase on expenses. The Assessing Officer has also failed to point out any specific item of suppressed sale. The assessee submitted all possible details before the Assessing Officer as well as before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) got the entire details submitted before him checked by the Assessing Officer, by calling for a remand report from her. The Assessing Officer has not been able to point out any single mistake or discrepancy in any of the voluminous and specific details submitted by the assessee. In spite of all these facts, the making of such huge addition in complete disregard of such voluminous, specific and precise details submitted by the assessee is indeed arbitrary and unjustified. The confirmation of such arbitrary, addition by the Commissioner of Income Tax (Appeals) without properly appreciating the submission made on behalf of the assessee which were supported by such clear, specific and precise details is unjustified and patently wrong. After giving our very thoughtful and deep consideration in the entire facts, we are of the considered opinion that the books of account maintained by the assessee are correct and complete and the method of accounting followed by the assessee is also a valid method, from which the profits can be properly deduced. On the facts and circumstances of the present case, neither the proviso to Section 145(1) nor Section 145(2) are applicable. The books results shown by the assessee, therefore, deserve acceptance. We, therefore, cancel the entire addition of Rs. 37,68,113 worked out by the Assessing Officer, by applying the net profit rate of 22 per cent. Since the Assessing Officer made net addition of only Rs. 15,95,123, the said net addition of Rs. 15,95,123 is directed to be deleted. We have already deleted the separate addition of Rs. 15,99,158 while dealing with the ground relating to alleged suppression of domestic sales.

It has come on the record that the method of accounting adopted by the assessee being followed by it in all the years and gross profit rate and turnover is gradually increased from 18.65 per cent, to 30.77 per cent, from the assessment years 1983-84 to 1988-89. It is not disputed that the books of account are supported by the purchase vouchers, vouchers for expenses, stock records, excise records, therefore, hypothetical and imaginary calculation of gross profit rate cannot be made unless some specific mistake in the accounts are pointed out. It is not disputed that the turnover and gross profit rate declared by the assessee in the year under consideration is better as compared to preceding year. In all past assessment years from 1983-84 to 1987-88, the books results were accepted as true and correct. In the absence of any specific instances of mistakes in the books of account and other records, the book results cannot be rejected on the basis of any such hypothetical calculations based on erroneous presumptions.

The Tribunal has given cogent and convincing reasons while setting aside the finding of the authorities below. The finding recorded by the Tribunal is bused on appreciation of evidence and material available on record. We do not see any good ground to interfere with the findings recorded by the Tribunal. The Tribunal has meticulously examined the evidence on record and we are in agreement with the finding recorded by the Tribunal on the aforesaid issue.

The next controversy is with regard to the disallowance of commission of Rs. 5,73,832 paid by the assessee on indirect export sales. The assessing authority as well as the Commissioner of Income Tax (Appeals) had disallowed the aforesaid commission but the Tribunal had deleted the said additions. Record shows that the commission was paid to M/s. Kejriwal Enterprises at 7 per cent, while the commission to Chinar Exporter (P.) Ltd. was approximately at 5 per cent. The aforesaid export houses did not pass on the benefit u/s 80HHC to the assessee being the supporting manufacturers. The Tribunal, while deleting the aforesaid issue, has observed as follows:

We have carefully considered the submissions made by the representative and have perused the orders of the Departmental authorities. We have also gone through the relevant documents submitted in the compilation. It is an undisputed fact that M/s. Kejriwal Enterprises and Chinar Exporter (P.) Ltd. are recognised export houses. The assessee exported its products in execution of the export contract obtained by these two export houses. This fact is also evident from the export invoices and other documents submitted in the compilation. The commission paid to them at 7 per cent, and 5 per cent, respectively are also supported by the documentary evidence given by these two export houses which forms part of the paper book. These documents are available at pages 142 to 157 of the paper book. These parties are not, in any manner, related to the assessee. The question as to who should claim the benefit u/s 80HHC in relation to such exports is a matter which is solely dependent upon the terms as may be mutually agreed between the assessee and these export houses. The assessee did not demand from these export houses that benefit u/s 80HHC will be claimed by the assessee and the export houses will be liable to issue disclaimer certificate u/s 80HHC to the assessee who was the supporting manufacturer. The law does not compel the trader to make trading transactions or business bargain according to the views of the Assessing Officer. If the assessee finds a particular transaction to be profitable even without getting the benefit u/s 80HHC it was perfectly legitimate and reasonable on their part to have agreed to such terms and conditions with these export houses. The assessee has shown a reasonable profit rate on their entire turnover. This necessarily implies that the assessee earned reasonable rate of profit on these indirect exports also. On a careful consideration of the entire relevant facts, we are of the view that there is absolutely no justification for disallowing commission aggregating to Rs. 5,73,832 paid by the assessee on these two export houses. The same is, therefore, deleted.

The fact that the aforesaid two export houses had perhaps claimed deduction u/s 80HHC cannot justify the disallowance in the hands of the assessee. It is exclusively within the domain of the traders as to how he should carry on his business. The Revenue authority cannot substitute their views about the manner and mode of carrying on the business. It has been contended by the learned Counsel for the respondent that M/s. Kejriwal Enterprises and Chinar Exporter (P.) Ltd. are leading export houses, they secured the export orders and got them executed either by themselves or through others including the assessee. The aforesaid exporters do not retain any margin on the supplies of hand tools made by the assessee-company in execution of their export commitments. Prices paid to the assessee-company for such supplies are the same at which these principal exporters have received the orders. For transferring the export orders to the assessee-company without retaining any margin or incentive thereon, principal exporters have charged commission of 5 per cent, to 7 per cent, for the their services and the efforts made in securing the export orders.

The finding recorded by the Tribunal on the aforesaid issue is also based on appreciation of evidence and material available on the record. We do not see any reason to interfere in the matter.

Thus, the Tribunal while deciding the aforesaid issue has given convincing, cogent and satisfactory reasons. The Tribunal has meticulously examined the evidence on record. We cannot substitute our opinion to that of the Tribunal unless it is found that the conclusion is based on irrelevant fact or impermissible. The approach adopted by the Tribunal and the reasons mentioned are good enough to satisfy the order. We do not find any illegality or infirmity in the order.

In view of the foregoing discussions, we do not see any merit in this appeal, the appeal is accordingly dismissed.